All news have an economics lecture

The new London free afternoon newspapers have been around for some weeks now. Not by chance, they were launched within days of difference. If in Economics everything is rational, what is rational in giving away your product. And why not simply put a price? Is everybody getting mad?

It is a normal situation throughout Europe in the last years: you arrive to the underground, the train station or get out of it and find your free copy of the morning paper. London is no exception about it, but now, there are also two free papers in the evening, invading the market of the traditional London evening paper, the Evening Standard.

How is it possible that two newspapers, with its costs of paper, printing, computers and above all journalists, can survive giving it for free? The answer is in the Internet. Sites like Google are making vasts amounts of money out of advertising. The idea is that while we are browsing the Internet or reading our newspaper, we see the advert, and then the brand or the product gets “exposure”, meaning that we now know it and are likely to buy it. Luckily for us, advertisers do not know about “ad-blindness”, according to which we have got so used to adverts that our eyes do not see them. Do not ask me to tell you one advert in the paper two minutes after I have binned it. I have no idea.

This is how thelondonpaper has made itself a place in London. Its contents are quite similar to the Evening Standard, the traditional evening London newspaper, with the only difference that you have to pay to get the latter.

A couple of days afte the launch of thelondonpaper, another free paper appeared in the London afternoons. It was delivered by the very same way, by an army of youngsters shouting “free newspaper” at almost every corner, but its approach to news is less serious, creating a differentiated product. The name was London Lite, and were edited by the same company of the Evening Standard.

Some people compare business strategy with war strategy. I can imagine the editors of the Evening Standard with the fresh news on the table that Rupert Murdoch’s company, also editor of the Sun, was planning to launch a free paper that was clearly targeting their evening paper. So they decided to strike back cutting the supplies of the opposite site and forcing them to desist.

It’s been said before that the free paper survives thanks to advertising. The more people see the advert the more exposure the brand gets, and the company is willing to pay more. If there is a second free paper, which also gives a different content, people will prefer one rather than the other. Hence, the readers will be splitted, the exposure will diminish and so will the price advertisers willing to pay. If the income from adverts is not enough to cover the costs, thelondonpaper will have to desist, and the hill of the evening market will have again only one king.

While this explanation might make sense, there is still one loose issue which is that, if London Lite tries to squeeze the profitability of the free afternoon newspapers, then it can not survive itself: the siege is also cutting their supplies. That is true, unless they are happy to run losses. And they could do that by subsidising it with the profits of other newspapers (they are getting supplies through a secret tunnel). Which is a strategy that Rupert Murdoch’s can also follow if his objective is breaking the Evening Standard dominance… Who will be the king of the hill?

We live in a limited world. Our biggest challenge is dealing with scarce resources. This is what Economics is about. And one of the main points is efficiency, that is, how to do something using as few resources as possible. For example, using a toilet.

I was recently to Vienna, which is a wonderful city, full of History, legends, music, amazing buildings and trams. As I did not want to miss anything, I was wondering around for more than 14 hours everyday. This, and the healthy habit of drinking quite a lot of water led me several times to visit the toilets of the Imperial city.

To my surprise, almost all the men’s urinals, either in palaces, auditoriums, restaurants or bars had an optical sensor. This means that when you leave, it “knows” and then pours water to clean. The toilets had a flush button that allowed you to pour only the amount of water needed, and some had even two buttons, one that released more water, and another for less. All these are methods to use water more efficiently.

This concern about the use of water would be understandable in a country like Spain, well known for its water shortages, but Austria uses only 3% of their annual water supply, so water should not be one of their concerns.

It clashes with the policy in England, another country where water, of which they think there is plenty, has never been a problem. There are no water-saving methods in English toilets. They treat water as if there was an unlimited supply. England has just had the driest year in many months, which has forced the authorities into a hose-ban and some information campaigns. And what is more, the shock of discovering that the water is not unlimited.

Why is the attitude towards water different for the general public of one and another country? The fact that Austria has run some campaigns to make the public concious does not explain the proliferation of expensive gadgets in the restrooms. The answer is in the water bill.

In England, people pay a certain amount of money, and they can use as much water as they want, in the bath, washing the car, watering the garden… In Austria, the households have water meters. The water bill increases with the use of water. So Austrians, private users or businesses, have an incentive to reduce their use. To the extent that furnishing a toilet with expensive items might be costly in the short term, but it pays with savings overtime. I am sure that items like “monoblock” taps or washing machines with water-saving programs, luxurious in England, are an everyday thing in Austria.

England has discussed the use of water meters, strongly opposed by some. But economists know that the market is the best way to allocate resources, and putting a price to something works miracles to make them concious users. Even in toilets.

Everybody knows Silicon Valley or Hollywood. They are the best examples of innovative places and there are hundreds of attemps to copy their success around the world. But these attemps are aiming at the wrong direction, because they can not copy the very reason of the success.

California is nowadays one of the most successful regions around the world, being the cradle and headquarters to companies like Paramount, Cisco, Sun Microsystems or Apple, to mention a few. Economists have rushed to explain what is so special about it. They explain that Silicon Valley is a “Cluster”, a “Technology District”, or “Technopole” among others. All these terms describe a geographic network of suppliers, providers and education centers that can benefit from being phisicaly close in a geographic area: there is a knowledge transference, they have similar needs of infrastructures and supplies, and it creates a network among them.

Having successfully explained what it is, many have been the attempts to copy them. Governments have poured money and financial help to create universities, attract companies and the best brains. But none of them have become as important as the California ones – well, Bangalore and Bolywood in India have done quite well-. This is because what Economists are not aware that there is one factor that they can not reproduce. This factor is what has made of California as it is now and, at the same time, its single major threat.

Iain Stewart, a PhD in geology has an interesting theory. He is one of those scientists turned communicators by the BBC documentaries. I have had the chance to see a few episodes of Journeys from the centre of the earth and Journeys into the ring of fire. They are really worth watching.
In the latter series, he explains that California lays on the San Andres fault. As you know, the surface of the Earth is divided in plates. The fault is the place where two of them join. And the Pacific plate and the American join just underneath California. The movement of these plates creates earthquakes… and it is the explanation for the presence of gold in the Californian mountains.

When in 1848 the “Gold Rush” started, caravans of people travelled to California looking for gold. These were “risk takers”, those who are willing to take risks in order to get a high reward, in opposition to “risk adverse” people, who prefer lower rewards but more secure.

San Francisco was a little tiny town at that moment, and increased its population 30 times thanks to these gold rushers. But also by all the rest who saw an opportunity to do business with those looking for gold, like a guy called Levi Strauss. When the Gold Rush dissappeared, again the rocks gave another incentive for the risk-takers: the moves of the San Andres fault had trapped in the Californian underground another kind of gold, Oil.

When the oil ceased being a source to make money, California had already become home for people willing to take risks in anything that could seem a good opportunity. And this is how somebody decided to invest in cinema and silicon chips.

Obviously, it is hard to argue that today’s success is due to the earthquakes, but the History of California implies that sometimes, the main factors of a successful economy lay on the most unexpected causes. In this case, the risk-takers that first populated California stated an attitude towards business and opportunities. This created an inertia, and still today, anyone who wants to take risks and explore opportunities will consider moving to California. So what makes a difference between these “clusters” and the rest is the attitude of people… and the rocks.

* “Clusters” by Malmberg and Maskell, “Technology Districts” by Storper, “Technopoles” by Castells and Hall

This is a blog trying to discuss the many aspects of actuality that have to do with Economics. From my point of view of economist, everything has to do with it. Many will say that I exagerate. If there is any blogosphere at all, and if it is true that blogs are a live discussion on the net, then I intend to add my little effort.